Obama's Emissions Regulations Will Cripple Coal, May Spur Carbon Trading



June 12, 2014

New regulations passed by the Obama Administration could dramatically alter how energy is produced in North America. If the rules survive legal challenges, power plants –especially coal power plants–will be forced to reduce emissions.

Power plants emit 39 percent of all greenhouse gases in the United States, and by 2030 their emissions will need to be 30 percent less than 2005 levels. The Environmental Protection Agency has a reduction goal for each state whose governments will be compelled to produce and share plans to reduce emissions.

Unsurprisingly, the announcement has caused controversy. Coal-dependent states like West Virginia have threatened to sue over the “blatantly illegal” rules. The announcement has also come during an election year leaving Democrats in coal-friendly states feeling uneasy.

But the Obama Administration, after facing a Congress with no appetite to address climate change, decided it was time to act. “Climate change, fuelled by carbon pollution, supercharges risks to our health, our economy, and our way of life,” EPA head Gina McCarthy said.

States will have several options in drafting up their respective action plans. The low price of natural gas will make gas-fired plants all the more tempting, particularly if they replace coal-fired facilities. States may also mimic earlier projects like RGGI, an effort by several states to create a cap-and-trade market for emissions.

Copying the Western Climate Initiative is another potential approach. WCI has tried to set up emissions trading policies between different jurisdictions (including California, British Columbia, Ontario, and Quebec) in order to find the most cost-effective emission savings.

For investors, the new regulations make it clear that coal is on the way out. Coal plants were already having a tough time competing with natural gas. But now that coal, and the carbon it emits, will be subject to federal regulation, any coal-fired plants will have a hard time attracting capital.

The regulations also ensure that demand for natural gas will remain strong in the long term. Environmentally controversial hydraulic fracturing will continue as local impacts are considered less important than the global challenge of climate change.

Reducing emissions from power plants will also raise energy prices, making energy conservation as well as alternative energy sources  (like solar, wind or biomass) cost-competitive. Environmentalists have long sought to include the externality of carbon emissions in energy prices. With these new regulations, that price signal may finally be felt in the world’s biggest economy and Canada’s largest trading partner.